Cliometrica (2009) 3:97121

DOI 10.1007/s11698-008-0028-6
ORIGINAL PAPER

The fiscal impact of the War of the Pacific

Richard Sicotte Catalina Vizcarra
Kirsten Wandschneider

Received: 3 April 2008 / Accepted: 22 May 2008 / Published online: 21 June 2008
! Springer-Verlag 2008

Abstract In the War of the Pacific (18791883), Chile defeated Peru and Bolivia,
and acquired territories that contained vast deposits of sodium nitrate, a leading
fertilizer. Chiles export tax on nitrates later accounted for at least one half of all
government revenue. We employ a multi-country model of export taxation in order
to simulate the potential government revenues that Bolivia, Chile and Peru could
have earned under the counterfactual scenario that Chile did not conquer the nitraterich provinces of its adversaries. Our results are that Peruvian and Bolivian government revenues could have been at least double their historical levels. We
estimate that, over the remainder of the nineteenth century, Chiles earnings from
nitrates would have fallen by 80%.
Keywords

Export tax ! Nitrates ! War of the Pacific ! South America

JEL Classification

C72 ! F13 ! F14 ! F17 ! H21 ! N46 ! N76

1 Introduction
In the War of the Pacific (18791883), Chile defeated the combined armies of Peru
and Bolivia and acquired territories on the Pacific coast of South America from both
countries. Peru lost its two southernmost provinces, Tarapaca and Arica, and
R. Sicotte (&) ! C. Vizcarra
University of Vermont, Burlington, VT, USA
e-mail: rsicotte@uvm.edu
C. Vizcarra
e-mail: cvizcarr@uvm.edu
K. Wandschneider
Occidental College, Los Angeles, CA, USA
e-mail: kirsten@oxy.edu

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R. Sicotte et al.

recovered the province of Tacna only after a final treaty was signed in 1929. Perhaps
the war is best remembered today because Bolivia lost its entire seacoast to Chile.
The issue continues to be a flashpoint in relations between the countries and
resonates strongly in their respective domestic politics.
But from the perspective of the time, the war was a major turning point as much
in the economic history of Chile and Peru as of Bolivia. The territories that Chile
absorbed contained vast depositsthe worlds only commercially viable deposits
of sodium nitrate, a natural source of nitrogen that was the worlds leading fertilizer
in the decades before World War I. Nitrate so dominated the economic life of Chile
during those years that the period is now referred to as el ciclo del salitrethe
nitrate cycle. The primary reason for the salience of nitrate in Chilean economic
history was the influence of the industry on the public treasury. The export tax on
nitrates routinely accounted for at least one half of all government revenue. With
those revenues, the Chilean government invested heavily in transportation,
infrastructure, and public education. For Peru, the loss of immense nitrate wealth
came at the most inauspicious time imaginable. In the 1870s Perus export boom
based on guano came to an end, and in 1876 the government defaulted on its
enormous foreign debt, leaving a number of railroads partially constructed. The
government was counting on public revenues from the nitrate industry to return to
solvency. The loss of the war was catastrophic. Economic depression, financial
chaos and civil war followed Perus defeat. Default settlement resulted in foreign
monopoly control of the countrys railroads.
Although historical work on the war is voluminous, there are no quantitative
estimates of the wars impact based on economic theory and statistical techniques.
Our goal is to fill that gap. One avenue that we considered was to construct
computable general equilibrium (CGE) models of the Bolivian, Peruvian and
Chilean economies, but the existing data are not adequate for such an exercise. The
data on the Chilean nitrate industry after 1880, however, are quite complete. Using
these data, we provide quantitative measures of the fiscal impact of the War of the
Pacific. We employ a multi-country model of export taxation in order to simulate the
potential government revenues that Bolivia, Chile and Peru could have earned under
the counterfactual scenario that Chile did not conquer the nitrate-rich provinces of its
adversaries. We estimate demand and supply elasticities from historical data with
which we are able to parameterize the model and obtain simulation results. Our
results are that Peru lost the potential to earn more than 1.5 million pounds sterling
per year in nitrate export tax revenue throughout the 1880s, a figure that exceeded its
entire government revenue at the time. We estimate that Bolivias potential revenues
from export taxes in were in the range of 200,000400,000 pounds sterling during the
1880s, much less than for Peru, but still large for a country with an annual budget
between 400,000 and 500,000 pounds sterling. Chiles actual government revenues
from nitrate export taxation averaged about 1.5 million pounds sterling annually over
the decade of the 1880s, but we estimate that without the benefit of the conquered
territories, revenue from nitrates would have been no more than 300,000 pounds.
These estimated effects are of sufficient magnitude that they imply major effects on
the governments treasuries. In particular, the options open to the countries insofar as
public investments and tax cuts were greatly affected by the war. We show that the

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99

pattern of government taxation and spending in the three countries in the decades
following the war reflect their different options. As a consequence, it is logical to
conclude that the war had a significant effect on the progress of infrastructure,
literacy, debt service and international trade, although quantitative estimates of these
effects are left for future work.
The paper proceeds as follows. In the next two sections we describe the
international market for nitrates before World War I, and the historical experience
of nitrate export taxation. We present our theoretical model in the Sect. 4. In
Sect. 5, we present our data and econometric estimation of nitrate demand and
supply elasticities. We next present our model simulation results and sensitivity
analyses. We discuss their implications in Sect. 7. Section 8 concludes.

2 The fertilizer market, 18701913

Sodium nitrate was the most important of several nitrogen fertilizers in the late
nineteenth and early twentieth centuries, accounting for 60% or more of commercial
nitrogen sources.1 Others included ammonium sulfate, manure, guano, cotton-seed
meal, dried blood, fish waste, and meat tankage. Synthetic ammonia and calcium
cyanamid became major sources of nitrogen fertilizer during and after World War I.
Ammonium sulfate was the major competitor of nitrates, but it required a different
application because sodium nitrate is a base and ammonium sulfate is a powerful acid.
Nonetheless, their prices tracked one another fairly closely (Fig. 1). This suggests that
the two fertilizers may have been reasonable substitutes, with a concomitant
significant positive cross-price elasticity. To the extent that ammonium sulfate and
other competitors of nitrates were relatively simple and attractive alternatives to
nitrate, the own-price elasticity of demand for nitrate would have been higher as well.
Nitrogen fertilizers were used especially for sugar beets, potatoes, cereals,
onions, and vegetables. The use of nitrogen products in the manufacture of
munitions and explosives was a secondary source of demand until World War I.2
The entire worlds production of sodium nitrate took place in the Atacama Desert of
South America. Because it dissolves easily in water, large deposits could only build
up in extremely arid climates. The Atacama Desert is one of the driest places on
Earth. The nitrate deposits extended across the pre-war borders of Chile, Bolivia and
Peru. Production was concentrated in the Peruvian province of Tarapaca, and near
the Bolivian port of Antofogasta.
Nearly all nitrate exports were to Europe and North America. Miniscule amounts
of nitrates were consumed in South American markets. Figure 2 shows the
evolution of nitrate exports by region from the 1870s until World War I. In order to
aid in interpreting the counterfactual, in the graph we continue to label regions
1

See Partington and Parker (1922, p. 25). Soto Cardenas (1998, p. 75) and Yunge (1909, pp. .308324);
Chile, Memoria de la Delegacion Fiscal de Salitreras (1893, 1897, 1902). See also annual reviews of the
chemicals trade in the Economist.

See Brown (1963, p. 231); Bermudez (1984, p. 198), Greenhill (1977, p. 247), Partington and Parker
(1922), Wheeler (1918); Chile, Memoria de la Hacienda (1889); Chile, Memoria de la Delegacion Fiscal
de Salitreras (various years).

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R. Sicotte et al.

Fertilizer Prices, 1873-1913

Pounds sterling per ton

25

20
Nitrate
Ammon Sulfate

15

10

1913

1911

1909

1907

1905

1903

1901

1899

1897

1895

1893

1891

1889

1887

1885

1883

1881

1879

1877

1875

1873

Year
Fig. 1 Fertilizer Prices, 18731913. Source: Nitrate: 18731879: Paish (1914). 18801913: Chile.
Ministerio de Hacienda (1925). Ammonium sulfate: Chile. Ministerio de Hacienda (1925)
Nitrate Exportsby Region

Thousands of Long Tons

2500

Chile
Bolivia
Peru

2000

1500

1000

500

1909

1908

1907

1906

1905

1904

1903

1902

1901

1900

1899

1898

1897

1896

1895

1894

1893

1892

1891

1890

1889

1888

1887

1886

1885

1884

1883

1882

1881

1880

1879

1878

1877

1876

1875

1874

1873

Year

Fig. 2 Nitrate Exports by Region. The legend shows countries, which is correct prior to 1879. From
1879 forward, Chile corresponds to exports from the port of Taltal and Caleta Colosa, Bolivia from
the ports of Antofagasta and Tocopilla, and Peru for exports from the various ports of
Tarapaca.Sources: 18731879: Bermudez (1963, p. 372374); 18801909: Chile. Ministerio de
Hacienda; Chile. Memoria de la Delegacion Fiscal de Salitreras; 19101913: Chile. Estadistica Comercial

pertaining to Peru and Bolivia, even though after 1883 these territories were
formally part of Chile. Nitrate exports expanded rapidly in the period from 1883 to
1913, averaging a 7% annual increase.
The nitrate fertilizer production process required key inputs of labor, dynamite,
water, coal and transportation. A layer of rock called caliche, usually several feet
below the surface, contained sodium nitrate. Caliche was mined by setting off
charges of dynamite below the surface and blowing apart the rock of a large area.

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The fiscal impact of the War of the Pacific

101

Workmen would then gather the chunks of caliche and transport them to a
processing facility, called an oficina. At the oficina, the sodium nitrate was extracted
from the caliche by the Shanks process, named after its inventor. The process
amounted to grinding down the caliche, leaching it out with hot water and then
crystallizing the nitrate.3 Once the nitrate was obtained, it was bagged and
transported by rail to the coast for export.

3 Government taxation of nitrate exports

Table 1 shows the export taxes that were in force in the respective countries from
1876 to 1913. Peru charged an export tax, which was modified several times, on
exports by private producers. Beginning in 1876, the Government of Peru began to
implement a scheme to purchase nitrate companies. Because this process was
gradual, private exports accounted for about 50% of total exports during the 3 years
prior to the war. At the time of the conflict, it was uncertain what path nitrate policy
would take in the future.4
Bolivian exports were duty free. Indeed, it was Bolivias enactment of a 10-cent
per quintal export tax in 1878 that was the direct cause of the war.5 The major
nitrate producing company, which had important Chilean investors, refused to pay
the tax. Chile claimed that this contravened the border treaties between Chile and
Bolivia, which included economic considerations. When Bolivia refused to rescind
the tax, Chile occupied Antofagasta. Chile later declared war on Peru, which was a
signatory to a mutual defense treaty with Bolivia.6
Prior to the war, Chile had no export tax on nitrates. With occupation and the
extraordinary expenses of war, the Chilean government created a commission to
study how best to take advantage of the resources now under its control. The
commissions recommendations, which were by and large adopted, were to
privatize the oficinas that had been in possession of the Peruvian government, and to
enact an export tax. Beginning in 1880, Chile charged a specific export duty of 2.57
shillings per cwt, which it maintained until the 1920s.7

The Shanks system was widely employed from the 1870s until the 1920s. See Bain and Mulliken
(1923), Bermudez (1963), Crozier (1997) and Whitbeck (1931).

See Bermudez (1963, p. 343) and Cruchaga (1929, pp. 257260) and Greenhill and Miller (1973, p.
125). The model we analyze below assumes export taxation by all three countries. A possible extension of
this model is to model one or more of the countries as operating a state-owned monopoly.

In 1878 10 Bolivian cents were equal to roughly 3.7 pence, so the tax amounted to 7 shillings per ton.
As the price of nitrate was 10.6 pounds sterling per ton, the tax was equivalent to about 3% ad valorem.
For BolivianBritish exchange, see Penalozo Cordero (1984, p. 49).

See Bermudez (1963), Dennis (1967), Kiernan (1955), Mayo (1979) and Querejazu Calvo (1995).

See Bermudez (1984, pp. 148194); Billinghurst (1889, pp. 3846) and Sater (1986, pp. 135140). The
report of the commission, known as the Comision Consultiva de Salitres, is reproduced in the Memoria de
la Hacienda (1880). The tax rate was that proposed by the commission, and it was approved by the
Chilean Congress after considerable debate. Proponents argued that the rate struck a balance between the
need to raise revenue for the nation at war, and the desire not to damage the industry. They maintained
that foreign consumers would bear most of the burden of the tax.

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R. Sicotte et al.

Table 1 Export duties, 18761913, pounds sterling per ton

Year

Perua

Bolivia

Chileb

1876

1.93 (JanuaryJune); 3.23

(JulyDecember)

None

None

1877

2.42

None

None

1878

3.45

0.35 (not enforced)

None

1879

None

18801913

2.57

The Peruvian export tax only applied to exports by private producers, not the government company.
Duties from 1876 until occupation were specified in Peruvian currency. The duty was initially 60
centavos of a sol per quintal (45.9 kg), but was changed to 1.25 soles per quintal. See Madueno (1919, pp.
78) and Bermudez (1963, p. 342344). PeruvianBritish exchange rates from OBrien (1982, p. 161),
were used to calculate shillings per cwt. These values fluctuated substantially during the period, so the
Peruvian duty is a rough estimate

Chile first imposed export duties on the occupied territories in 1879 (from September for Antofagasta
and from December for Tarapaca). These duties were 40 centavos of one peso per 100 kg for Antofagasta,
and 1.5 pesos per quintal for Tarapaca. Bermudez (1984, pp. 9899, 144147). Again using exchange
rates from OBrien (1982, p. 161), these correspond to 0.52 shillings per cwt, and 4.29 shillings per cwt,
respectively. In October, 1880, Chile enacted an export duty 2.57 shillings per cwt, which remained in
place until the 1920s. Exports from Taltal and Aguas Blancas paid fifty percent of the duty until 30 June
1882, and 30 June 1883, respectively (Hernandez 1930, pp. 112118)

The nitrate export tax revenues earned by Peru and Chile during the years 1876
1913 are displayed in Fig. 3.8 Before the war, Peruvian revenues approached 1
million pounds sterling. Chilean revenues increased from about 1.5 million pounds
sterling in the mid 1880s to nearly 7 million pounds sterling by 1913. Nitrate
revenues constituted at least 20% of all Peruvian government revenues before 1879,
although much of it was earmarked for payments related to the expropriation scheme
and the administration of the state nitrate operation. In Chiles case, nitrate revenues
rose steadily in importance throughout the 1880s until they reached 48% of revenues
in 1890. This percentage remained more or less constant until World War I.9

4 A multi-country model of export taxation

In this section we present a theoretical framework for analyzing the fiscal impact
of the war under the counterfactual that pre-war boundaries persisted and that the
8
The figures for revenues include nitrate of soda and iodine. Some oficinas also produced iodine from
the nitrate deposits. The vast majority of these iodine-producing oficinas were in Tarapaca. See Crozier
(1993), and Memorias de la Delegacion de Salitreras, various years, for iodine exports by port. Iodine
export tax revenues were about 15% of the total for most of the period. Government revenues include
both export tax revenues and revenues from government sales (the Peruvian Government company for
18761879 and the Chilean government during 18801882). Figures for Chile do not include proceeds
from the privatization of nitrate deposits, which could amount to 200,000 pounds sterling per year (see
Resumen de la Hacienda Publica de Chile desde 1833 hasta 1914).
9

See Tantalean Arbulu (1983), Madueno (1919), Greenhill and Miller (1973) and Mamalakis (1971, p.
184). Nitrates were about 70% of total Chilean exports.

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The fiscal impact of the War of the Pacific

103

three national governments taxed nitrate exports. We model two alternative

objective functions for the governments. First, that they wished to maximize social
welfare by setting an optimal export tax, and second, that they wished to
maximize government revenue. The key difference between the two taxes is that
under the former, governments trade off the benefits of the tax revenue paid by
foreign consumers against the decreased producer surplus earned by domestic
suppliers (domestic consumer surplus does not exist in our case because the
product was not consumed locally). Under the latter, the focus is exclusively on
maximizing government revenue. Figure 4 shows the maximum revenue tax under
two basic assumptions. First, we assume that the nitrate industry within the
country is perfectly competitive. This allows us to draw a straightforward supply
curve for the industry, simplifying the problem facing the government. In the
multi-country model that follows, we assume that each countrys industry is
perfectly competitive, which allows us to focus on the non-cooperative game
between the three governments, rather than model imperfect competition among
the actual producers of nitrate within each country.10 The second assumption is
that the demand and supply curves are linear. The initial equilibrium is given by
equating export supply and export demand, resulting in price P1 and exports Q1.
In order to obtain the maximum revenue ad valorem tax rate t*, a government
equates marginal export revenue with the marginal cost of raising export tax
revenue. This increases the world price to P2, decreases the quantity of exports to
Q2, and raises tax revenue to tP2 Q2 P2 $ P2 1 $ tQ2 : An optimal export tax
differs in that the government does not exert monopsony power over its own
producers. Thus, the optimal tax is solved by equating export supply with
marginal revenue.
Chilean producers had a monopoly in the world nitrate market. Under the
counterfactual, producers from three countries would have shared the market, and
therefore the optimal (or maximum-revenue) taxes for each country would depend
upon the tax rates of other countries. The strategic interdependence of optimal tax
rates is conducive to game-theoretic analysis. We follow the multi-country
theoretical model of export taxation proposed by Panagariya and Schiff (1994,

10

Perfect competition requires homogeneous products, many firms and ease of entry. Although the
nitrate deposits were of distinct qualities, the processed product was homogeneous. As far as the number
of firms, there were dozens of firms in Peru, but initially fewer in Bolivia and Chile. The ease of entry
depends upon capital requirements, capital markets, and legal barriers. Barriers were not likely to be too
high. Many firms freely accessed international capital markets. Furthermore, governments could auction
lands to prospective producers if they deemed competition inadequate. To the extent that domestic
industries were imperfectly competitive, this would have reduced the revenues accruing to the
government with jurisdiction. If, for example, imperfect competition would have been more severe in
Chile and Bolivia than in Peru, then Peruvian government revenues would have been higher, and the other
governments revenues would have been lower. Finally, nitrate producers attempted to form cartels
beginning in the 1880s. Some of these cartels were more successful in their collusion than others.
Insufficient quantitative evidence remains to model and estimate the cartel subgame. As discussed below,
in our empirical estimation we account for imperfect competition by including a dummy variable in our
regression for years in which cartels operated. This approach follows that of Irwin (2003a), in his study of
U.S. steel exports, who includes a dummy variable to measure the effect of the U.S. steel merger.

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R. Sicotte et al.

Government Revenues from Nitrate

8000
7000
6000

Peru
Chile

5000
4000
3000
2000

1913

1911

1909

1907

1905

1903

1901

1899

1897

1895

1893

1891

1889

1887

1885

1881

1883

1879

1877

1000
1875

Thousands of Pounds Sterling

104

Year
Fig. 3 Government revenues from nitrate. Sources: Chile: Resumen de la Hacienda Publica de Chile
desde 1833 hasta 1914, Mamalakis (1971, p. 184). Peru: Hunt (1985)

1995).11 Accordingly, we solve a model for linear demand and supply curves for
three countries exporting a homogeneous product. This corresponds well in the case
of nitrate, which was extracted from caliche by the universally employed Shanks
process. The optimal (maximum-revenue) tax in each country is a function of the
export demand and supply parameters, as in the single country case, but export
demand for each country is a residual demand, which depends in part on the export
taxes employed by the rival countries. Thus, each countrys optimal tax rate can be
expressed as a reaction function, depending on other countries tax rates. The Nash
equilibrium solution concept can be used to solve these functions simultaneously.
QD A $ BP
qsi

ai bi p i

QD
i A $ aj $ ak $ B bj 1 $ tj bk 1 $ tk P

ti P $ pi =P;

where Eq. (1) is the world demand fuction, Eq. (2) is the supply function for country
i, Eq. (3) is the residual demand function for country i, and Eq. (4) is the export
tariff reaction function for country i. The formal model is defined and solved in the
11

Yilmaz (1999, 2006) applies this framework in his empirical investigation of the international cocoa
market. Our approach differs from that of Irwin (2003b) in his analysis of the optimal export tax on cotton
in the antebellum U.S. The most significant difference is that our model explicitly includes the reaction
functions of all market participants while Irwin does not model the optimal reactions of other countries to
an optimal U.S. export tariff. Our methodological choice is motivated by our desire to obtain estimates for
all three countries simultaneously, and to empirically investigate the importance of the strategic
interaction.

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The fiscal impact of the War of the Pacific

105

Price
Marginal Cost of
Raising Revenue

Export
Supply

P2
P1
P2(1 t)

Export
Demand
Marginal
Revenue
Q2

Q1

Quantity

Fig. 4 The maximum revenue export tax

Appendix. Note that the tax rate is expressed as a percentage of the world price, so
that resulting tax revenue for country i is ti*qi*P. This means that the tax rate is not
directly comparable with ad valorem tax rates, which typically are expressed as a
percentage of the pre-tax domestic price.
In order to operationalize this model, we obtain econometric estimates of the
world demand elasticity. The econometric exercise will also provide an estimate of
the historical (Chile) supply elasticity, which we use as a benchmark for the supply
elasticities of the three countries nitrate-producing provinces. Once we have
obtained these estimates, we then use them to obtain estimates of the supply and
demand parameters in our reaction functions (A, B, ai and bi). We do this by making
use of the fact that eD,S = DQ/DP*P/Q, and that DQ/DP is the inverse of the slope of
the demand (supply) curve (B and bi in the model). Using actual price and quantity
from each year, we obtain the slopes of the demand and supply curves for that year.
Knowing a point on the curve and the slope allows us to find the intercept (A and ai).
With the parameters in this model obtained in the preceding manner, we solve for
the Nash optimal and maximum revenue taxes under the counterfactual. After
calculating those taxes, we then calculate the effects on the world price, exports, and
resulting tax revenues. As a by-product, the econometric estimates of demand and
supply elasticities also enable us to obtain estimates of Chiles optimal and
maximum revenue taxes under the historical case of Chile as world monopolist.

5 Econometric estimation of nitrate demand and supply

In this section we estimate an econometric model of the nitrate market, in order to
provide benchmark estimates in the simulation of the theoretical model presented

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above. The data span the years 18811913, during which time Chile held control of
all provinces and there was no change in the tariff. Because price and quantity are
simultaneously determined, the regressions are estimated using three stage least
squares.
The demand for Chilean nitrate exports is specified as:
ln Qt b0 b1 ln PUK;t b2 ln PAMMON;t b3 INCt b4 ln PUK;t$1 lt ;
where Qt is the total quantity of nitrate exports, PUK is the price of nitrate in the
United Kingdom, PAMMON is the price of ammonium sulfate, which was the
principle competitor of nitrate at the time. INC is an index of the gross domestic
products of the nitrate-importing countries, weighted by their consumption.12 We
include a lagged price. Nitrate could easily be stored, so last years price strongly
affected this years nitrate demand, a high previous price indicating that consumers
held off on stock accumulation. l is a random demand shock.
The inverse supply of Chilean nitrate exports is specified as:
ln PUK;t a0 a1 ln Qt a2 ln Wt a3 ln PCoal;t a4 Intt
a5 Cartel a6 ln Qt$1 et

W is a Chilean wage index and PCOAL is the price of coal, both major input
prices. No series of Chilean coal prices is available. Between 40 and 50% of coal
consumed in Chile during this period was imported from Britain.13 We estimate the
price of coal in Chile by adding the freight rate from Britain to Chile to the British
price of coal. Int is the Chilean interest rate, which has two possible interpretations.14 First, it is the price of financing capital expenditures and can be considered
an input price. Second, consistent with Hotellings (1931) model of natural resource
extraction, producers are hypothesized to trade off the benefits of saving the income
from mineral extraction at the interest rate versus the benefits of extracting the
minerals later and selling them at the future price. Because we do not have access to
the price and interest rate expectations of producers, the inclusion of this variable is
an incomplete econometric specification of the natural resource extraction problem.
Holding price and interest rate expectations constant, however, we expect the sign
of this variable to be negative, as higher interest rates lower the opportunity cost of
production today. Nitrate producers formed cartels of varying duration over the
period of our study. We include a dichotomous cartel variable that takes the value
12

Quantity is from Chile, Ministerio de Hacienda, Memoria de la Hacienda. Nitrate and ammonium
prices are from Chile, Ministerio de Hacienda, Antecedentes. We use United Kingdom prices for both of
these products. The U.K. nitrate price was the international standard. The country was the first major
export market, and remained an important market and trans-shipment point. Chilean sources continued to
quote UK, rather than German, French or U.S. prices, into the 1920s. The countries in the foreign income
index are the United Kingdom, Germany, France, the United States, the Netherlands, Belgium and Italy.
Together they accounted for over 90% of nitrate consumption. The GDP data are from Maddison (2000).
The consumption weights are from Chile, Antecedentes.
13

We thank an anonymous referee for providing us with this figure.

14

The wage is calculated from Wagner (1992) and Braun et al. (2000). Coal prices are from Mitchell
(1988), and the freight rates are from Oribe Stemmer (1989). Interest rates are from Braun et al. (2000).

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Table 2 Three stage least squares estimates of nitrate demand and supply, 18811913
Dependent variable

Chilean export demand

(log total export volume)

Chilean export supply

(log export price)

Constant

5.69***

-0.13

Ln export price

-2.54***

Ln ammonia price

0.73***

Ln foreign income

2.39***

Ln lagged export price

0.95**

Ln export quantity

1.27***

Ln wage

0.40*

Ln coal price

0.10

Interest rate

-0.06

Cartel

0.20**

0.93

0.75

Ln lagged export quantity

Adjusted R2

-1.14***

N = 33
*** Significant at the 1% level; ** significant at the 5% level; * significant at the 10% level

one when a cartel was in operation and zero when it was not.15 Because cartels
should raise prices if they are effective, the expected sign is positive for this
variable. For the supply equation we include a lagged term of the total export
quantity to again capture the storage features of the nitrate. We expect todays price
to be lower if yesterdays exports were relatively high.
Table 2 displays the results of the estimation. The price elasticity of demand for
Chilean nitrate exports is estimated to be -2.54 indicating that demand is price
elastic. The cross price elasticity with ammonium is 0.73 and the income elasticity
with respect to the foreign income is 2.39. The lagged price coefficient behaves as
expected. For the supply equation, the reciprocal of the coefficient on export volume
indicates the elasticity of export supply, so the export supply for Chile is inelastic at
a value of 0.79. Wages are positive and significant as expected. The coefficient on
coal prices has the correct sign but is insignificant. This is perhaps due to the
unfortunate lack of a coal price series directly from the region. The interest rate is
negative and insignificant. The cartel variable suggests that producer collusion did
have some ability to raise prices. Lagged exports are associated with lower prices, as
expected.
Our econometric investigation yields elasticity estimates that are statistically
significant and highly plausible. Ours are the first econometric estimates of nitrate
demand and supply elasticity for this period so it is impossible to argue plausibility
by comparing with previous work. It is likely that nitrate demand was elastic,
because there were different substitute fertilizers available. Insofar as the supply
elasticity, the estimate is statistically significant and suggests inelastic supply. The
fact that there was virtually no domestic market for nitrate meant that all nitrate
15

Information on cartel operation is from Brown (1963) and Chile, Ministerio de Hacienda (1935).

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R. Sicotte et al.

produced had to be stored or exported. The lack of substitute domestic market surely
contributed toward a lower export supply elasticity.

6 Simulation results
We now calculate maximum revenue and optimal taxes. We begin by examining
the historical case with Chile as an international monopolist on nitrate exports.
We solve our theoretical model in a single country setting (setting a2, a3, b2, b3
equal to zero), so as to make the results directly comparable to our multi-country
case. We obtain our parameters for 1883, using the method described above. The
simulation results are presented in Table 3. The baseline cases refer to
demand elasticity = -2.54 and supply elasticity = 0.79, as estimated. For those
values, an optimal tax rate of 34% would have generated revenues equal to
about 2.082 million pounds sterling at a world price of 11.6 pounds sterling per
ton. A maximum revenue tax would have been double, 68%, and earned
revenues of 3 million pounds sterling. Both were substantially in excess of
Chiles actual export tax earnings in 1883, which approached 1.5 million pounds
sterling.

Table 3 Simulations of optimal and maximum revenue tariffs: Chile as a monopolist (year: 1883)

Actual

Elasticities

World price
(pounds sterling
per ton)

Tax rate
(%)

Quantity
(thousands
of tons)

Tax revenue
(thousands of
pounds sterling)

11.2

23

576

1,479

eD = -2.54

11.6

34

522

2,082

11.9

31

485

1,800

11.2

25

568

1,564

11.2

24

560

1,524

13.0

68

336

3,000

12.6

39

390

1,915

12.3

66

342

2,777

11.9

34

419

1,722

Optimal tax
Baseline case

eS = 0.79
eD = -2.54
eS = 3
eD = -4
eS = 0.79
eD = -4
eS = 3
Max. revenue tax
Baseline case

eD = -2.54
eS = 0.79
eD = -2.54
eS = 3
eD = -4
eS = 0.79
eD = -4
eS = 3

123

The fiscal impact of the War of the Pacific

109

We check the sensitivity of these results to changes in the elasticities. More

elastic supply or demand will lead to lower optimal and maximum revenue taxes.
So we treat our initial estimates as an upward limit and explore what happens with
substantially more elastic supply and demand. In particular, first we raise the
supply elasticity to 3, holding the demand elasticity constant. Then we increase
the demand elasticity to -4, holding supply elasticity constant. The final case we
examine is with a demand elasticity of -4 and a supply elasticity of 3. Revenues
fall to 1.5 million in the optimal tax case and to 1.7 million in the maximum
revenue tax case. Taken as a whole, our simulation-based estimates of Chiles
optimal tax rate and tax revenue are reasonably close to the actual tax rate and
revenue Chile earned. A complete discussion of whether Chile was seeking to fix
an optimal or revenue-maximizing tax rate is beyond the scope of this paper. Still,
our results suggest that Chile was not maximizing revenue, but was closer to
fixing an optimal tax.
We now present simulations of nitrate tax revenue under the counterfactual that
the Peru, Bolivia and Chile held to their original pre-War of the Pacific borders. We
first solve the model using our econometric estimates of supply and demand
elastiticies, and we assume that each area had the same supply elasticity. We
provide estimates for 1883, 1893, 1903 and 1913. The estimates for later years are
more speculative, because our model is static and the pattern of entry by nitrate
firms in country would be affected by tariff policy in each country. Further,
governments might take positive steps to stimulate their nitrate industries, such as
constructing railroads or ports.
Table 4 contains the optimal tax simulations and Table 5 the maximum revenue
simulations. It is clear that for 1883, 1893 and 1903 Peru was earning most of the
revenues because Tarapaca provided most of the exports during those years (Fig. 2).
For 1883, Perus optimal tax rate of 29.2% yields revenue of about 1.5 million
pounds sterling. The optimal rates for Bolivia and Peru are less than 5% and
generate comparatively little revenue. The tax rates and relative positions of the
countries revenues remain stable in the 1893 and 1903, although revenues increase
as the market for nitrates grew substantially.

Table 4 Simulations of Nash optimal export taxes

Year World
price
(pounds
sterling
per ton)

Peru
Tax
rate
(%)

Bolivia
Quantity
(thousands
of tons)

Tax revenue Tax

(thousands
rate
of pounds
(%)
sterling)

Chile

Quantity Tax
Tax
revenue rate
(%)

Quantity Tax
revenue

1883 11.2

29.2

456

1,496

4.3

79

38

1.6

31

1893

9.4

30.3

784

2,240

3.0

94

27

2.9

90

25

1903

9.4

27.2 1,061

2,710

6.2 278

162

1913 10.7

13.9 1,093

1,628

10.6 852

968

139

39

11.2 900

1,080

eD = -2.54; eSi = 0.79

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R. Sicotte et al.

Table 5 Simulations of Nash maximum revenue export taxes

Year World
price
(pounds
sterling
per ton)

Peru

1883 12.9

67.2 289

2,503

60

45

349

59

18

1893 10.8

67.2 441

3,207

59

53

340

59

51

327

1903 10.9

66.4 673

4,865

60

161

1,052

59

80

512

1913 12.6

62.9 660

5,234

62

508

3,970

62

537

4,216

Tax
rate
(%)

Bolivia
Quantity
(thousands
of tons)

Tax revenue Tax

rate
(thousands
of pounds
(%)
sterling)

Chile

Quantity Tax
Tax
revenue rate
(%)

Quantity Tax
revenue

133

eD = -2.54; eSi = 0.79

The major change comes in 1913. During this period the provinces of
Antofogasta and Taltal expanded production enormously, so the simulation results
based upon this historical fact reflect it. Perus optimal tax rate falls as its market
power diminishes (its residual demand curve becomes more elastic), while the
opposite occurs for Bolivia and Chile. The tax rates converge, as do the revenues.
Importantly, Perus simulated revenue actually declines from 1903 to 1913.
Repeating the exercise for the maximum revenue tariff, we find substantial
increases in the tax rate and revenue relative to the optimal tariff. In the case of
Peru, the maximum revenue tax rate remains quite stable at between 62.9% in
1913 and 67.2% in 1883 and 1893. Revenues increase from the already substantial
sum of 2.5 million pounds sterling in 1883 to over 5 million pounds by 1913,
although much of the increase is complete by 1903. As residual demand elasticity
rises, the burden of the tax is increasingly being borne by domestic producers. The
Bolivian and Chilean maximum revenue tax rates are much higher than their
optimal rates, and generate much more revenue, albeit still far less than Peru until
1913.
We report sensitivity analysis of the three-country maximum revenue baseline
simulations in Table 6.16 We experiment with lower and higher demand and supply
elasticities. We focus on the year 1883. Cases 1 and 2 show results at lower and
higher world demand elasticities, respectively, holding supply elasticities constant.
A substantially less elastic world demand leads to much higher revenues for each
country, but still a relatively small amount for Chile. Cases 3 and 4 reflect lower and
higher Peruvian supply elasticity, respectively, holding other parameters constant.
These cause major changes in the maximum revenue tariff and revenue. In
particular, in case 4 Peru cuts its tariff rate to 37% and its revenues fall to 1.6
million pounds, about 900.000 less than it earned at the estimated elasticities
reported in Table 5. Interestingly, as Peru cuts its tariff, revenues for Bolivia and
Chile fall somewhat. This is because the cut in the Peruvian tariff results in greater
Peruvian exports, and concomitantly a decrease in Bolivian and Chilean residual
demand. Finally, in case 5 all supply and demand elasticities are given high values,
16
We conducted similar analyses for the optimal tariff. The maximum revenue tariff is more sensitive to
changes in supply elasticity than the optimal tariff, as in Table 3. These results are available upon request.

123

-2.54

-2.54

-4.00

3.00

3.00

0.50

0.79

0.79

3.00

0.79

0.79

0.79

0.79

Peru supply Bolivia and Chile

elasticity
supply elasticities

Tax revenue in thousands of pounds sterling

-0.50

-4.00

Demand
elasticity

Case
#

32

37

91

65

80

1,403

1,617

3,248

2,327

4,292

26

60

60

60

60

Maximum
revenue tax rate
(%)

Maximum
revenue tax rate
(%)

Maximum
revenue tax
revenue

Bolivia

Peru

Table 6 Sensitivity analysis of maximum revenue tariff under the counterfactual (year: 1883)

206

329

354

321

715

Maximum
revenue tax
revenue

26

60

59

60

58

Maximum
revenue tax rate
(%)

Chile

79

126

136

123

278

Maximum
revenue tax
revenue

The fiscal impact of the War of the Pacific

111

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R. Sicotte et al.

and this results in much lower maximum revenue tax rates for all three countries,
and much lower revenues.

7 The impact of the war on government revenues

The simulations provide estimates of tax revenues for Chile, Peru and Bolivia under
the counterfactual that they maintained their pre-1879 borders. If so, no country
would have had a monopoly in the nitrate market, although Perus initial position
was one of substantial market power (most nitrate exports were from Tarapaca until
after 1900). The simulation results are consistent with this observation. Perus
optimal and maximum revenue taxes (and revenue) were less than what Chiles
were as a monopolist. Yet, they still represented a considerable sum, exceeding 1.5
million pounds in 1883 every scenario that we examine. Bolivia, according to our
estimates, could have earned a maximum of about 700,000 pounds sterling in 1883,
and this only if the world elasticity of demand was markedly below our econometric
estimates. The other simulations put Bolivian revenues at between 321,000 and
354,000 pounds in 1883. Finally, Chiles prospects for substantial revenues from
nitrates in 1883 were extremely limited, according to our results.
In order to give some sense of the fiscal significance of our results, we compare
these estimates of nitrate revenues to overall pre and post-war government revenues
in the three countries. These comparisons are presented in Table 7. In the upper
panel of the table, actual government revenues for each country are provided for
1878, 1885, 1903 and 1913. All figures are converted to pounds sterling. The year
before the war was a year of low revenues. Each country had seen declines in
government revenue over the 1870s, and Bolivia was especially hard hit in 1878, a
year in which its citizens endured famine and plague.17 Before the war the Peruvian
government revenues exceeded Chilean government income, while the Bolivian
government earned much less. We chose 1885 as the next benchmark year, because
it was after Chile and Bolivias war finance regime had ended. The Peruvian
government, now engaged in civil war, was attempting to raise as much revenue as
it could. Even with that in mind, Peruvian government revenue fell dramatically
between 1878 and 1885. Chile, in contrast, saw a very large increase in government
revenue over the same period. Nitrate revenues played a significant role in that
expansion. Bolivias revenue increased substantially as well. Over the next
25 years, all countries saw revenues increase, although nearly all of the increase
for Peru and Bolivia occurred in between 1903 and 1913. In 1903 and 1913, Chile
earned more revenues from nitrates alone than the combined government revenues
of Peru and Bolivia. By 1913 the relative fiscal positions of the Chilean and
Peruvian governments had changed dramatically compared to 1878. However, the
Bolivian government continued to earn the smallest revenues of the three.
In the lower panel of Table 7, we show how the maximum revenue nitrate
revenues, as calculated in our simulations and reported in Table 5, compare to the
actual revenues that those countries earned. The simulation results in Table 5 are
17

See Bonilla (1980), Paz (1927) and Sater (1979).

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113

Table 7 Actual and potential roles of nitrate revenue in government finance

1878

1885

1903

1913

Actual government revenues, thousands of pounds sterling

Bolivia

137

448

492

1,070

Chile

2,317

3,824

8,096

13,958

Nitrates
Peru
Nitrates

1,079

3,716

6,801

3,595

1,160

1,607

3,549

1,093

Counterfactual maximum nitrate revenues as a percent of actual revenues

Bolivia

78% (46%)

214%

371%

Chile

3% (2%)

6%

30%

12% (7%)

14%

62%

216% (121%)

303%

147%

Perc. of actual nitrate revs

Peru

Bolivia: Paz (1927), Mitchell (2003). Exchange rates from Hillman (1984, p. 426), and McQueen (1924,
p. 6). Chile: Resumen de la Hacienda Publica de Chile. Peru: Basadre (1983), Tantalean Arbulu (1983)
The counterfactual nitrate revenues are from the baseline Nash maximum revenue export tax simulation, in which the elasticity of world demand is -2.54 and the elasticity of supply for all countries is
0.79. These are the elasticities obtained from the econometric estimates. The figures in parentheses in
column three of the lower panel are calculated using simulated export revenues from case 5 in Table 6.
Bolivian government revenues are for 1900 and 1910, not 1903 and 1913

based upon the econometric estimates of demand and supply elasticity. For 1885,
we also use the lowest estimates of maximum tariff revenues from Table 6 (case 5),
which are based upon the most elastic demand and supply. These lower estimates of
tariff revenue as a percent of actual revenues are reported in parentheses. First, for
Bolivia, the counterfactual maximum tariff revenue, although relatively small in an
absolute sense, would have been a large increase in government revenues for the
country, even in the 1880s. Using the elasticities from the econometric estimation,
Bolivian maximum revenue tariff would have generated revenues 78% of actual
Bolivian revenues in 1885. Using the lower estimate of revenues calculated from the
higher elasticities, nitrate revenues still amounted to 46% of actual revenues. The
potential revenues in 1903 and 1913 were even more significant, far outstripping
actual Bolivian government revenues at the time. In the case of Peru, the maximum
tariff revenue also was hugeat least equal to actual Peruvian government revenues
in each year examined. The interpretation of Chile is different, because its
governments actual revenues included proceeds from the nitrate export tax. So
instead, we compare counterfactual nitrate revenues to actual nitrate revenues.
Simulated nitrate revenues were between 7 and 12% of actual nitrate revenues in
1885; 14% in 1903 and 62% in 1913 after the local industry in Taltal took off.
Obtaining quantitative estimates of total government revenues under the
counterfactual is more speculative, because it also requires making assumptions
about how each government would have adjusted their tax policies, and then
estimating the economic effects of those changes. Given the fact that the existing
data are not up to the requirements of such an exercise, we restrict ourselves to
analyzing what some of the most likely changes in policy would have been.

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R. Sicotte et al.

In the case of Chile, we can reach some conclusions about possible policy changes
under the counterfactual by observing Chilean government tax policy before and after
the war. Facing a severe decline in government revenues in the 1870s, Chile raised
import tariffs and enacted an income tax and an inheritance tax (Sater 1979). Between
1880 and 1900, however, the average import tariff (import tariff revenues divided by
the value of imports) fell by more than 25%.18 The income tax and inheritance taxes,
which never raised more than 200,000 pounds sterling per year, were repealed in 1890.
Cariola and Sunkel (1985) observe that other internal taxes were eliminated in the
1880s. Scholars tie the reduction and elimination of these taxes directly to the nitrate
windfall. Chiles import tariffs and the internal taxes imposed deadweight losses of an
uncertain magnitude. Conversely, according to our estimates Chiles nitrate export tax
was efficiency enhancing (the optimal export tax on nitrates that we calculate was
positive and greater than Chiles actual tax). Thus, the war permitted changes in
Chiles fiscal policy that overall were efficiency enhancing. Quantitative estimates of
these savings are beyond the scope of our analysis.
As with Chile, Bolivia did not earn revenues from nitrate export taxes prior to the
war, and was also suffering from a severe economic depression. We have estimated
that the taxation of nitrate exports could have supplied funds easily surpassing 50%
of the revenues that the Bolivian government actually raised between 1880 and
1913. Bolivia eschewed direct taxes, and relied heavily on import and export tariffs
for government revenue. We found no evidence of an increase in import tariffs in
the immediate aftermath of the war, which is probably not surprising, because the
government was not seeking to offset lost nitrate revenues (recall that the export tax
was not successfully imposed). Insofar as other taxes, export duties on silver and tin
were vital for the Bolivian government prior to World War I. It is reasonable to
assume that Bolivia possessed market power in those two industries, so that some
positive export tax was optimal (Hillman 1984). Thus, barring political considerations, those export taxes would not have been eliminated even if Bolivia had held
on to Antofogasta. Bolivia might have chosen to reduce import tariffs if it had
earned the levels in the counterfactual, but because of the very large size of potential
nitrate revenues relative to the actual Bolivian budget, it is reasonable to conclude
that the country would have seen a net increase in government revenues
approximately equal to whatever nitrate tax revenues they earned.
Peru was earning about 1 million pounds sterling from the nitrate industry prior
to the war. As Table 7 shows, government revenues plummeted by more than that
amount between 1878 and 1885. There are two reasons why. First, Peruvian
government revenues from the sale of guano, which had been in decline in the 1870s
because of the exhaustion of the best deposits, did not recover. Second, the country
suffered a severe trade depression that impacted imports, and therefore tariff
revenues. Indeed, immediately following Perus defeat, it raised import tariffs, but
this did not provide a large increase in government revenue. Later it created a
tobacco tax and established a state salt monopoly. (Basadre 1983; Coatsworth and
Williamson 2002). Taxes on agricultural exports later became additional sources of
revenue. All of these taxes implied deadweight losses (including the export taxes,
18

See Diaz and Wagner (2004). Coatsworth and Williamson (2002) obtain a similar result.

123

The fiscal impact of the War of the Pacific

115

which were on products where Peru had no ability to affect the world price).
Further, none of the new taxes came close to being able to raise revenue comparable
to what a nitrate export tax had the potential to raise.
The conclusion is inescapable that both Peru and Bolivia would have had much
larger government revenues, at least 50% more and probably more than double, if they
had not lost the war and had been able to impose a nitrate export tax. This is true even
if policy-makers lacked the ability or will to enact optimal or maximum revenue taxes.
Recall that according to our estimates, Chile achieved its massive revenues even
though it was taxing below the optimal and maximum tariff rates. There is no reason to
believe that Peru would have been less able to raise revenue than Chile. Moreover, the
Peruvian government was strapped for funds, and had the motivation to extract as
much revenue as possible. This was primarily due to the fact that it had defaulted on its
foreign debt, which required at least 2 million pounds annually to service.

8 Conclusions
As a result of the War of the Pacific, Chile was able to obtain a stream of revenues
that would have been difficult, if not impossible, to achieve otherwise. First, the
direct taxes that it had imposed just prior to the conflict generated a relatively small
amount of revenue, and the elite had only gone along with their enactment
grudgingly. Second, what market power Chile enjoyed in the international fertilizer
market was, at least initially, almost entirely due to the conquest of Peruvian
territory. Its counterfactual nitrate export tax revenues would have been paltry in the
short run.
Peru and Bolivia lost access to a resource that, under a variety of assumptions
about elasticities of supply and demand, would have had the potential at least to
double government revenue. In the counterfactual, Bolivia, like Chile, would have
had extremely limited market power. In terms of revenues, although we estimate
that Bolivia would not have earned more than a few hundred thousand pounds
annually before 1900, these funds would have been large relative to its small
government budget. Peru, in contrast, would have had substantial market power, as
its province of Tarapaca was home to most of the early nitrate industry. It likely
would have taken years for this situation to change. Historically, Tarapacas market
share did not decline significantly until the twentieth century. We estimate that the
Peruvian government lost the potential to earn at least 1.5 million pounds sterling in
government per year over the 1880s.
Our study also reaches some interesting conclusions pertinent to Chilean
economic history. Given the econometric estimates of demand and supply, we
calculate that Chile was setting an export tax slightly below the optimal rate.
Additionally, since we estimate that demand for nitrate fertilizer was more elastic
than supply, any tax revenue gains would involve a substantial burden for domestic
producers. To the extent that these producers were foreign companies, one could
argue that Chile would not have weighted the firms earnings, unless they were
concerned about the foreign policy implications. Our findings suggest that the
political economy of Chiles export tax is a promising area of future research.

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R. Sicotte et al.

Table 8 Railroads (km)

1877
Bolivia

Source: Mitchell (2003)

1895

1913

209

972

1,284

Chile

1,624

3,497

8,070

Peru

2,030

1,734

3,276

Assessing quantitatively the overall economic impact of the war remains

difficult. We can conclude that, because of the significance of the war for
government revenues, government spending also would have been commensurately
affected. Inasmuch as this entailed public investments in infrastructure and
education, the effects could have been far-reaching. Table 8 shows the kilometers
of railroads in operation in the three countries in 1877, 1895 and 1913. The Chilean
system expanded very rapidly after the war, but so did Bolivias. The Chilean
government played an important role in fomenting railroad construction. Railroad
construction was financed at least in part by the accumulation of foreign debt.
Between 1885 and 1900, Chile accumulated 19 million pounds of external debt,
much of it used to finance public investments. Without the steady stream of nitrate
revenues behind it, Chile might have had a much more difficult time borrowing in
international capital markets.
In the case of Bolivia, much of the railroad expansion was financed directly by
foreign capital, mainly Chilean. Railroad development in Bolivia played a key role
in the expansion of silver and tin exports. The Peruvian case contrasts with the other
two. The countrys rail system expanded at a much more modest rate. The initial
decline is at least in part due to the loss of the southern provinces, which contained
some important rail lines serving the nitrate ports of Iquique and Pisagua.
Government spending on education is illustrated in Table 9. Chile spent more to
begin with, but greatly expanded its spending and educational system in the late
nineteenth and early twentieth centuries. The rate of expansion in Peru was much
slower, and the total spending in Bolivia was quite low as late as 1913. Literacy
rates reflected these investments, with Chiles 43% by 1900, a level not approached
by Peru until around 1930 and Bolivia until after World War II. This cursory review
of the data on railroad development and education spending suggests that the war
played an important role in Chiles ability to finance public investments.
It is more difficult to state what would have been the spending outcome in Bolivia
and Peru. With regards to Bolivia, it experienced relatively rapid railroad expansion
despite having lost the war. There is little basis for drawing conclusions with regard to
education spending in Bolivia. Insofar as Peru, its railroad development clearly
lagged, as did its investment in education. At least in theory, the large increase in
government revenues could have been used to finance expansion in either area.
Table 9 Government education
spending, thousands of pounds
sterling

Source: Mitchell (2003)

123

1877

*1900

1913

Bolivia

NA

NA

185

Chile

196

545

1,563

Peru

78

143

260

The fiscal impact of the War of the Pacific

117

However, the complicating factor for Peru is that it had a very large foreign debt in
default. Servicing that debt would have required at least 2 million pounds sterling per
year. This exceeds our lower estimates of nitrate revenues for 1883, and even would
have constituted a significant proportion of Perus potential nitrate revenues 20 years
later. Ultimately, drawing more firm conclusions about how Peru and Bolivia would
have allocated nitrate revenues under the counterfactual require a more detailed
political economic analysis, which we leave to future research.
Future work might also employ our findings to reinterpret some of the previous
historical assessments of the impact of the war on overall economic and political
development. Scholars of Chile such as Palma (2000), Cariola and Sunkel (1985)
and Mamalakis (1971), have argued that the nitrate boom was beneficial to Chiles
economic development, although their opinion is not shared by all, for example
Gunder Frank (1976). From the perspective of political economy, one can
hypothesize that in the absence of the nitrate tax, Chile would have maintained
income and inheritance taxes that would have resulted in greater income and wealth
equality. Sater (1979) defends this position. Sokoloff and Zolt (2007) persuasively
argue that Latin Americas regressive tax structure has been both a symptom and a
cause of continued inequality, and that inequality has been a major factor inhibiting
economic growth in the region. Further investigation also could draw on the work of
Acemoglu et al. (2005), Drelichman and Voth (2008), and Robinson et al. (2006),
and examine the connections between the control of nitrate resources, institutional
development and economic growth.
Acknowledgments The authors would like to thank Mauricio Drelichman, Bill Gibson, Marc Law, Art
Woolf, Kamil Yilmaz, and participants in the 2005 Canadian Network for Economic History conference,
the 2007 Economic History Association conference, and the University of Massachusetts-Amherst
economic history workshop for helpful comments on previous versions of the paper. We would also like
to thank Matthias Aschenbrenner for assistance with the simulations.

Appendix A: three-country model of export taxation

Three countries export a product to a world market. None of the countries has a
domestic market for the product. We assume linear demand and supply, and a
perfectly competitive industry. The relevant demand and supply equations are:
World demand:
Country 1 supply:

QD A $ BP
qs1 a1 b1 p1

Country 2 supply:
qs2 a2 b2 p2
Country 3 supply:
qs3 a3 b3 p3

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R. Sicotte et al.

Each country sets an ad valorem tariff with respect to the world price:
P1 P1 $ t1
P2 P1 $ t2
P3 P1 $ t3

We proceed with the equations for country one, noting that the equations for the
other countries are symmetric.
Country one residual demand:
D
s
s
QD
1 Q $ q2 $ q3
A $ a2 $ a3 $ B b2 1 $ t2 b3 1 $ t3 P

The marginal revenue function for country one is:

MR1

$2QD
1 A $ a2 $ a3
B b2 1 $ t2 b3 1 $ t3

The marginal cost function for country one is:

MC1 p1

1 s
q $ a1
b1 1

We now solve for the reaction functions yielding the Nash optimum export taxes.
First, set MC1 MR1
and qs1 QD
1 q1

solve for q1
q1

q1 a1
$2q1 A $ a2 $ a3
$
b1 b1 B b2 1 $ t2 b3 1 $ t3

a1 B b2 1 $ t2 b3 1 $ t3 A $ a2 $ a3 b1
B b2 1 $ t2 b3 1 $ t3 2b1

Now, by substituting the above expression for q1 into country ones demand we
get P as a function of the parameters, A, B, ai, bi.
!
"
q1 $ A a2 a3
P$
B b2 1 $ t2 b3 1 $ t3
And by substituting the expression for q1 into country ones supply we get p1 as a
function of the parameters.
p1

1
q1 $ a1
b1

With expressions for P and p1, we can derive the reaction function for optimal
export tariff:
t1

123

P $ p1
P

The fiscal impact of the War of the Pacific

119

We now solve the reaction functions yielding the Nash maximum revenue taxes
for country one. From above, we know that:
T P $ p1 q1
where T is tax revenue.

!
P$

Solving for T:

q1 $ A a2 a3
B b2 1 $ t2 b3 1 $ t3

"

!
"
$q1 A $ a2 $ a3 q1 $ a1
$
q1
B
b1
#!
" !
" $
A $ a2 $ a3 a1
1
1

$
q1 q1
B b1
B
b1

Maximize taxing revenue, the first-order condition is:

!
"
A $ a2 $ a 3 a1
1
1

$ 2q1
0
B b1
B
b1
Solving for q1
q1

a1 B b2 1 $ t2 b3 1 $ t3 A $ a2 $ a3 b1
2B b2 1 $ t2 b3 1 $ t3 b1

Substituting, we obtain expressions for P and p1 as a function of the parameters.

!
"
q1 $ A a2 a3
P$
B b2 1 $ t2 b3 1 $ t3
p1 1=b1 ' q1 $ a1 :

And from these we get the reaction function for country one:
t1 P $ p1 =P:

This is the same form as the reaction function under the optimal tariff, but q1
under the maximum revenue tariff is less than q1 under the optimal tariff. Note
that under the maximum revenue tariff the denominator is multiplied by two. As
consequence, when substitutions are made, the reaction functions are algebraically different. We solved the simulations using the mathematical software
MAPLE.
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